Cost-Reimbursement Contract

A contract type under which the government reimburses the contractor's allowable incurred costs plus a fee, used when risk or uncertainty is too high for a fixed-price arrangement.

Cost-reimbursement contracts reimburse contractors for allowable costs they incur in performing the work, plus a fee that represents profit. They are used when work requirements are uncertain enough that a fair and reasonable fixed price cannot be established at the time of contract award, and when the government is better positioned than the contractor to absorb the financial risk of that uncertainty.

Types of Cost-Reimbursement Contracts

Cost-Plus-Fixed-Fee (CPFF) is the most common type. The fee is set at negotiation and does not vary with actual costs. Cost-Plus-Award-Fee (CPAF) provides a base fee plus an award fee determined by periodic government evaluations of contractor performance. Higher award fees incentivize superior performance. Cost-Plus-Incentive-Fee (CPIF) adjusts the fee based on actual cost compared to a target cost, incentivizing contractors to control spending. Cost-No-Fee (CNF) reimburses costs without a profit fee, used for nonprofit research institutions and universities.

Allowable Costs

Not all costs are reimbursable under cost-reimbursement contracts. FAR Part 31 defines allowable costs as those that are reasonable, allocable to the contract, and compliant with applicable cost accounting standards. Common unallowable costs include entertainment, lobbying expenses, certain legal costs, and interest on borrowings. Contractors must maintain adequate cost accounting systems to segregate contract costs.

DCAA Oversight

The Defense Contract Audit Agency (DCAA) audits cost-reimbursement contracts to verify that billed costs are allowable, allocable, and reasonable. Contractors must maintain adequate internal controls, accounting systems, and documentation to support all claimed costs. DCAA approval of a contractor's accounting system is often a prerequisite for receiving cost-reimbursement awards.

Cost-Reimbursement vs. Fixed Price

Cost-reimbursement contracts shift financial risk to the government and require significantly more administrative oversight than fixed-price arrangements. Agencies use them for R&D, large system development programs, and other high-risk acquisitions where defining requirements precisely enough for a fair fixed price is not feasible at contract award.